Basic Economics of Nuclear Power

Ian Schultz
March 19, 2012

It's All About Money

For all the public talk of clean energy and need for
reduced pollution, where we actually get our energy from ends up being
largely decided by simple economics. Further, an economic discussion of
energy is useful because in the context of efficient markets, price
captures a large multidimensional space of competing options and reduces
them to a single dimension to determine feasibility. People follow money
and will ultimately only pursue the cheapest option that satisfies
external requirements. In particular, power generation has two primary
cost modes that determine economic feasibility: Capital costs and fuel
costs. In the case of nuclear power fuel costs are relatively
inexpensive, however there are significant costs associated with the
construction of a new power plant. [1]

How Much Does a Nuclear Plant Cost?

Costs for nuclear power plants are driven primarily
by the upfront cost of capital associated with construction. While a
natural gas power plant could be constructed for as little as $850/kW,
recent estimates put construction of a nuclear power plant at $4000/kW.
[2] This estimate means a 1 GW plant should cost about $4 billion if
financed by a lump upfront payment. In practice, however, it is much
more expensive to construct nuclear power stations because there are
significant uncertainties associated with their construction times.
Because construction of a new nuclear power plant represents a
significant cost it must be financed as an investment and requires
interest payments over the life of a loan. The rate of interest
(discount rate) represents uncertainty in whether the plant will be able
to service payments on its loan. The construction of a new nuclear power
plant involves risk in construction delays, public opposition, and
changes in the regulatory environment, all of which could lead to
significant cost overruns and adversely affect the profitability of a
project. Modeling a nuclear power plant as an annuity costing an initial
$4 billion with a 40 year life and interest rate of 11% (corresponding
to approximately 50-50 debt/equity split) results in a total cost of
more than $17 billion over the life of the loan. [3] The point is that
an attempt to fund construction of a new nuclear power station is
squeezed from both sides: they are inherently more expensive to
manufacture and also have a much higher cost of capital than fossil-fuel
power plants. In reality construction costs could be even worse; recent
examples in the United States have priced from $5 to $12 billion per 1.1
GW reactor over the relatively short construction time span. [4] Even
though the fuel costs of a nuclear plant are fairly low, these upfront
costs associated with construction and financing tend to dominate the
ultimate cost of nuclear power and make it significantly more expensive
than fossil fuel power. [3]

Incentives & Subsidies

Another important aspect of nuclear energy is that
federal subsidies and incentives to the energy industry can
significantly alter the cost structure and ultimately competitiveness.
It has been claimed that in the United States building new nuclear power
plants is only possible through generous government subsidies. [5] In
fact according to one study nuclear energy is the third most heavily
subsidized industry on a per-kWh basis, receiving less than only solar
and wind energy. [6]

Looking to the future, one of the most important
questions yet to be answered regarding the viability of nuclear energy
is how policy makers will choose to deal with excessive greenhouse gas
emissions. The argument is that the external costs in the form of
carbon emissions associated with fossil-fuel power plants should be
internalized into real costs through a carbon tax. [7] Because nuclear
power emits virtually no carbon dioxide, even a moderate carbon tax
could significantly boost the economic appeal of nuclear power. For
instance, a $100/tonC tax would make nuclear power very competitive with
natural gas power. [3]

Conclusions

The nuclear energy industry faces many hurdles to
grow on a worldwide scale in coming decades. In addition to the known
costs discussed already, additional safety requirements after the
Fukushima Daiichi nuclear disaster are likely to increase both capital
and operating costs of nuclear power. [5] Even more important are the
negative externalities associated with Fukushima: nuclear power was
never particularly popular to begin with and public support in much of
the world has declined significantly in the wake of the Japanese
disaster. [8] Despite these challenges, nuclear power enjoys several
important economic advantages over competing technologies. It has a
proven track record of large-scale baseload power generation as well as
long plant lifetimes and therefore if should remain part of the energy
portfolio well into the future. There could even be a nuclear
renaissance should construction costs of plants be reduced significantly
or, perhaps more likely, if a carbon tax is instituted. While most
developed nations have been decreasing reliance on nuclear power in
recent years, either of these events could be the paradigm shift that
the nuclear industry desperately desires.